Sunday, February 15, 2009

Marketing Mix: How to get your startup small business (more) profitable.

I've covered before how to leverage your product income, as well as the real basics to economics. But unfortunately, I can't find these links for you.

Let's recap (quickly):I. Economics consists of four inter-related functions, not just two as is taught -

Supply

Demand

Information

Service

Defined:

Supply means having a valuable product, but also covers how much competition you have - if you are selling a commodity product (and so have to compete on price as well.)

Demand - is anyone actually looking for your product and how much can they afford to pay for it.

Information - are you actively promoting this product so people can find you?

Service - are you delivering high quality, or schlock?

These inter-relate: More promotion will increase demand. Low-quality will decrease demand - and if you are selling tainted peanut butter, can decrease supply as well. Non- or slow-delivery will decrease demand for your product. Information: An incorrect price (too high or too low) can affect demand.

Lately, I found there are some other terms floating around, which also describe and actually combine economics and leverage - called Marketing Mix. While I have to do another post to actually define this in non-gobbledygook language, you can see that these four economic principles above are actually a very workable description of how to set up your own marketing mix.

II. Income Leverage - Most marketing is based on simple math - and is a numbers game. Some relevant facts:

Additionally, this predicts you will have a base conversion of 2-3% (if you make no hideous errors in your sales copy.)

Your profit (or any retailer) is dependent on a simple formula:

Leveraged Sales - Overhead- or -

(Products x Sales x Outlets) - Overhead

Definitions:

Products: Number of products you are offering.

Sales: Number of sales you get per week or per day.

Outlets: Do you only have one website?

Overhead: Cost of doing business (payroll, webhosting, taxes).

Examples:

When you are selling one product per week on one site, you have a leverage of 1.

If you increase the volume of that products sales to 100 per week on that website, you have a leverage of 100.

When you routinely sell 20 products 100 times per week - this increases to 2,000.

If you get 100 affiliates selling your product, your leverage is now 200,000.

Now subtract your overhead and you'll see that a brick-and-mortar store selling one product per week will have to sell a very expensive product to cover it's costs. This would be a high-end luxury car, or an expensive dress or suit. If you are selling one product on the web, you only have to cover your item cost, shipping, plus your web host. Online is obviously cheaper.

Sell an info product which is instantly delivered and is created digitally when it is sold - and your overhead is mostly just your web host cost.

However, when you use affiliates to sell your stuff and give away 50% of your sales price as a commission, then you are trading half your profit on those sales - which you wouldn't have gotten otherwise. So if you sell 2,000 info products yourself at $20 each, that's $40,000 profit. If you get 100 affiliates to sell them at half price, you just increased your profit by $200,000. But you didn't have to do anything except set up your affiliate sales to pay their commission after you delivered the product. $160,000 increase in profit over doing it all yourself.

Now, here's the Marketing Mix.

That post on the bell curve above covers why you want to move over to subscribers. Your conversion rate goes up from an average 2-3% upwards to above 50% or more.

This means that every time you add a new product to your shopping cart (and promote it to your list), you aren't just increasing your leverage value by 1 or 1,000 - you are also increasing it by a percentage of the number of people on your list. So the new formula becomes:

And guess what - your affiliate sales outlets also have lists. So if you tell them about your new product (and send them one so they can see how good it is), then this can take your profits into a completely new range.

Assuming 50% of the subscribers buy - and say cumulative you have about 100,000 subscribed clients between you and your affiliates - so take a new $20 product and figure that on release day, you'll have about $20 x 50,000 = $100,000+ profit in about 24-48 hours.

And now you see how Rich Sheflin, Jack Humphrey, and some of these big-name marketing guys can rake in the dough by simply releasing a new product 5 or 6 times per year. All info products and mostly sheer profit. The rest of the time, they sell their "velvet rope" subscriptions so people can have "exclusive" access to their new products (and almost guarantee they will buy them at a "discount" in advance of the sales date). Humphrey used to sell a subscription to over 3,000 people at around $90 per month. A clean $3.24M income - and he worked hard to make sure those people got good value for that money, plus was able to afford a small crew working to provide that value. (A couple of $50,000 yearly salaried programmers wouldn't take too much of a bite out, would it? Or give them a percentage of the profit instead - keeps them looking to see how they could improve things to increase monthly, quarterly, and annual profit...)

Do the numbers on that: $100,000 6 times a year = $600K. Add in the subscriber monthly fees - and you get nearly $4 million in gross income per year. Overhead might run a quarter of that or less, so you have about $3mil profit every year. Not that this happens overnight, but certainly it is possible - as outlined above.

Now, there are a lot more details to this. And I hope to go into these in later posts, time and inspiration permitting...

III. Putting this into use for yourself or your company:

For the small business owner, or someone considering a start up, this means a couple of things to increase your profits: